The Popularity Trap

Walk into any retail chain’s head office and ask which products are performing well. You will hear the same answer: the high-volume sellers. The ones that move thousands of units per week, fill the most shelf space, and dominate the promotions calendar.

But popularity and profitability are not the same thing. In fact, when you trace the full cost of handling, promoting, stocking, and servicing a product through the supply chain and into the store, the numbers tell a different story. Research across retail operations consistently shows that 15-30% of top-selling SKUs are unprofitable at the net level once all costs are properly allocated.

Why Gross Margin Misleads in Retail

Most retail chains evaluate product performance using gross margin: the difference between selling price and purchase cost. A product bought at EUR 6 and sold at EUR 10 shows a 40% gross margin. That looks healthy.

But gross margin ignores everything that happens between the warehouse and the customer’s bag. Shelf replenishment labour for fast-moving items can run 3-5x higher than for slow movers. Promotional markdowns reduce revenue without reducing handling costs. Returns and shrinkage rates vary dramatically across categories. Cold chain or special storage requirements add costs that never appear in the gross margin calculation.

A product with 40% gross margin and high cost-to-serve can easily be less profitable than a product with 28% gross margin that sits quietly on the shelf, rarely gets returned, and never requires promotional support.

What Cost-to-Serve Reveals

Cost-to-serve analysis traces all direct and indirect costs to individual SKUs, stores, or customer transactions. For retail chains, this means allocating:

Supply chain costs – warehousing, picking, transport, and delivery frequency per SKU. A product requiring daily replenishment consumes more logistics resources than one restocked weekly, regardless of unit cost.

In-store labour – shelf stocking, facing, price changes, and promotional display setup. Fast-moving items in complex packaging consume disproportionate store labour hours.

Shrinkage and waste – perishable goods, theft-prone categories, and items with short shelf life carry hidden costs that standard margin analysis ignores.

Promotional costs – the actual margin impact of markdowns, multi-buy offers, and loyalty point subsidies attributed back to the specific SKUs that trigger them.

Returns and complaints – customer service time, restocking labour, and damaged goods processing per product category.

TDABC: From Averages to Actual Resource Consumption

Time-Driven Activity-Based Costing (TDABC) models how much time each resource group spends on each activity, then multiplies by the capacity cost rate. For a retail chain, this means building time equations that capture the actual minutes consumed per SKU movement through each stage of the operation.

Instead of spreading warehouse costs evenly across all products by volume, TDABC captures the fact that a pallet of uniform boxes takes 4 minutes to receive and shelve, while a mixed pallet of fragile items with special handling requirements takes 22 minutes. The cost difference is real, and it flows through to the SKU-level profitability calculation.

When retail chains run their first TDABC model, common discoveries include: private-label products are more profitable than assumed because they have simpler logistics; high-profile branded promotions often destroy net value once promotional handling costs are included; and small-format or convenience stores carry structurally different cost profiles than hypermarkets, meaning the same product has different profitability in different store formats.

What to Do With the Data

The goal is not to delist popular products. It is to make informed decisions about pricing, promotion, and shelf allocation. Practical actions include:

Repricing – adjusting selling prices on high-cost-to-serve items where the market allows, even by small amounts. A EUR 0.15 price increase on a product selling 50,000 units per month adds EUR 7,500 per month to margin with zero additional cost.

Supplier renegotiation – using cost-to-serve data to renegotiate purchase prices or delivery terms with suppliers whose products consume disproportionate handling resources.

Planogram optimisation – allocating shelf space based on net profitability rather than sales velocity. Sometimes the right answer is less shelf space for a popular but low-margin product and more for a slower-selling but genuinely profitable one.

Promotion discipline – evaluating promotional campaigns based on total cost impact, not just revenue uplift. A promotion that increases unit sales by 30% but requires custom displays, additional replenishment runs, and 20% markdowns on unsold stock may be a net loss.

Start With Visibility

The first step is not a full TDABC implementation across every store and SKU. It is a focused analysis of your top 200 products by volume, tracing the actual costs they consume. Most retail chains find actionable insights within the first round of analysis – products to reprice, promotions to restructure, and supplier negotiations to reopen.

Take the free Profitability Profit Check to see where your retail operation stands, or explore our TDABC workshops to learn how to build these models for your business.